Coming just a few months after criminalizing the enforcement of illegal non-competes , Colorado has placed further limitations on restrictive covenants. On May 10, 2022, the Colorado legislature passed HB22-1317, narrowing the permissible scope of non-competes.
Except in the context of sale of a business or recoupment of training/education expenses, the validity of a non-compete will now be conditioned on both whether the restriction is narrowly drawn to protect trade secrets, and whether the employee meets the "highly compensated" test. That test currently requires annual income in the six figures – at least $101,250 -- and will be adjusted annually by the Colorado Department of Labor. The bill allows non-solicitation provisions, which place a lesser burden on employee movement, for employees making 60% of the highly compensated employee standard. The statute also requires cases involving Colorado employees to be litigated in Colorado under Colorado law, imposes notice obligations, and provides for damages, attorney fees, and a $5,000 per employee penalty for violations.
Colorado's legislation follows a nationwide trend originally sparked by the enforcement of non-competes against lower paid employees (e.g. sandwich makers). At least ten other states have banned enforcement of non-competes against low wage earners, with Washington and Oregon also setting six-figure thresholds. These laws can create complications for employers paying based on commissions, and for employees who initially earn less than six figures but cross the threshold as time transpires. The notice requirement imposed by some states creates further uncertainty.
And where is the federal government? As we reported last summer, in July 2021, President Biden issued his Executive Order on Promoting Competition in the American Economy directing the FTC to limit or ban non-competes, especially with respect to low wage earners. The FTC has moved slower than the states, but more recently has asked for public comment and conducted workshops, so we should expect something soon.
In light of what has occurred and what is portended:
- in states setting a wage threshold, employers should work with counsel to modify the non-competes to meet the standard and consider adjusting compensation for key employees who are close to the threshold;
- even in states without a minimum standard, employers should review the positions subject to a non-compete and strongly consider limiting non-competes to those whose employment with competitors would pose an unfair competitive threat and who are high wage earners; and
- companies should evaluate tightening and justifying their restrictive covenants.
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